The Hawaii Real Property Tax Act or HARPTA is a Hawaii state tax law which mandates backup withholding from real estate transactions occurring within the state when the seller is not a resident of Hawaii. Since a non-resident selling party might fail to file a state income tax return to report the appropriate amount of capital gains tax, Hawaii withholds 7.25% of the contract price.
Almost a third real estate (by value) in Hawaii is owned by non-residents. These include US-citizens living on the mainland, active military service members who live in Hawaii and retain their home state residency, and non-US persons. In September of 2018 the rate of withholding was increased from 5.00% to 7.25% causing additional sticker-shock at closing transactions around the islands. HARPTA withholding is $72,500 on a million dollar sale price and in the vast majority of transactions HARPTA withholding greatly exceeds the amount of actual tax due.
Planning ahead when you decide to sell your Hawaii real estate can save you precious cash flow by eliminating HARPTA withholding from your proceeds at the closing table. Exemptions are available from HARPTA and may apply to you. But exemptions require timely filing and must be accurately prepared and contain sufficient supporting documentation.
HARPTA withholding for a typical condo sale averages over $50,000. Capital gains taxes on the transaction may be 50% of that or less. If you won’t owe any capital gains on the sale or no other tax liabilities to the state, you can generally recover the full amount of HARPTA withholding. Refund times vary but most arrive 7within 60 days.
Before refunding any HARPTA withholding, the Hawaii Department of Taxation will confirm your compliance with filing requirements. If you have rented your property during the period of your ownership you were required to file Hawaii State Income Tax returns, Hawaii General Excise Tax and Transient Accommodation Tax if the property was rented for periods of less than six months at a time. Once current on all applicable tax filings and taxes due you will be eligible to file for an early-refund of all or a portion of the HARPTA withholding.
Applications for HARPTA exemptions or refunds require you to prepare an estimate of your capital gains tax liability to the state of Hawaii. Such calculations can be complex and the application must contain accurate and complete documentation or it will be rejected. Filings for HARPTA refunds larger than $15,000 are typically subjected to enhanced review by the Hawaii Department of Taxation.
Any claim for refund HARPTA withholding must be made within three years of the due date of your final Hawaii income tax return.
About the Author: Mark W. Lee, CPA has an extensive background in federal and state taxation, regulatory compliance and litigation. He began his career in the Houston office of Deloitte in 1990 and spent the next twenty five years delivering financial, taxation and operational consulting services to public companies, governments and high net worth individuals. His CPA firm in Maui assists mainland and international property owners with recovery of HARPTA withholding.